Genes normally present in euchromatic domains 0are silenced when packaged into heterochromatin, as exemplified in Drosophila melanogaster by Position Effect Variegation (PEV). Loss-of-function mutations that result in a loss of silencing have identified many critical components of heterochromatin. Heterochromatin formation in pericentric regions appears to be dependent on histone deacetylation, followed by methylation of histone H3 at lysine 9 to generate H3-mK9, and association of Heterochromatin Proteins 1 and 2 (HP1 and HP2). But how is heterochromatin formation targeted to appropriate regions of the genome? We have recently demonstrated that the RNA interference machinery plays a role in Drosophila, as previously reported for S. pombe. We observe that silencing of transgenes embedded in heterochromatin is lost (suppression of PEV) as a result of mutations in piwi, aubergine, or homeless (spindle-E), all of which encode RNAi components. Mutation of homeless leads to a reduction in H3-mK9, and a dramatic delocalization of HP1. We suggest that a "Targeting Complex" containing siRNAs homologous to repetitious elements in heterochromatin can direct specific association of HP1 with these regions. We will test this model by 1) testing candidate loci for loss-of-function mutations that produce the above phenotypes, identifying other RNAi components and histone modification enzymes involved; 2) using a TAP-tag approach to isolate protein complexes associated with three key proteins, HOMELESS, a PAZ/PIWI domain protein (known to bind siRNA), and SDS3, a critical component of the Sin3 histone modification complex, to determine the pattern of interactions; and 3) developing an assay for these phenotypes (loss of H3m-K9, delocalization of HP1) in tissue culture cells to facilitate an unbiased screen for critical factors. The results of these investigations should elucidate the RNAi/heterochromatin pathway, providing new insights into mechanisms of gene silencing, a critical process in development, relevant to many health problems, including cancer.